Buying and selling securities and other investments isn’t as easy as picking up a basket of groceries.
Buying and Selling
The main concern is: Will you have to invest through a broker, and what kind of a broker?
Full-service brokers provide investment advice, research, and execute trades in other investment securities. Discount brokers, including many online brokerage services, provide an online platform to execute the trades. As the name implies, discount brokers take less of the fee and commissions, and this could be an attractive benefit if one can do the work of screening and choosing the investments themselves.
Different instruments require minimum investments, e.g., a minimum of Rs 500 in a mutual fund as a SIP or Rs 100,000 in a corporate bond. Investors must understand the minimum amounts required to invest in cash market instruments and derivative segments. Trading in a derivative part requires a margin amount, which could be higher as it is based on a percentage of multiple of an investment scrip price, i.e., a lot size.
Even discount brokerages charge fees and commissions for processing the trades. Investing in financial products such as mutual funds and variable annuities may involve sales and distribution costs known as entry and exit charges. These products may also have investment management fees and administration costs. When using insurance products as investments, one must also consider insurance costs. Finally, it should be noted that some tax-deferred investments may levy fees and tax penalties for an early withdrawal.
Debt securities like corporate or GOI bonds repay the principal on a specific date they are said to mature. The maturity period could be decades long, e.g., GOI-dated deposits.
Tracking Investment Value
The main concern is: How would an investor know the performance of the investments?
The answer for stocks and many mutual funds could be as easy as picking up the newspaper or subscribing to an online investment information service. Others may involve extra work, like researching a company’s bond rating or performing calculations to determine the current value of a bond issue.
The efforts that an investor wants to put into tracking an investment value would help in determining and choosing an investment product.
Tax Aspects in Investments
Some investments require tax payment on a perpetual basis, e.g., tax on bank interest, capital gains tax at the time of sale of shares, etc. The taxation of investment gains could be a complex topic.
A few things that an investor should be aware of are:
- Capital Gains
- Tax Breaks
Capital gains are usually taxed lower to encourage investment if an investor holds them for a certain period. However, not all accrued value is capital gains. For instance, even though one might buy a zero-coupon bond at a discount and redeem it for much more money, the increased value would be an interest and not capital gains. The interest is usually taxed as a regular income. Understanding various aspects of financial transactions and their respective tax impact is essential.
Tax-deferred investments allow funds to build up a tax-free investment fund. Investors only pay taxes on their earnings when they take them out as cash.
In few investments, investors may need to pay tax on their accrued earnings even though they may not be able to use them for some time, e.g., interest on a bank fixed deposit. In other types of investments, there would not be any tax at all stages of investment, i.e., initial investment, interest generation, and redemption, e.g., Public Provident Fund (PPF). Knowing some basic tax rules regarding investments could be complicated but valuable knowledge.
Conclusion: Understanding Transaction Process and Regulations is Inevitable
An investor might have understood basic concepts of different asset classes and portfolio diversification. However, the real journey starts with investing. Investing could be direct or indirect, but both need active steps like purchasing and selling financial securities, tax computation and return filing, understanding the market, economic conditions, etc.
Development in financial technology has solved many issues that an individual and busy investor may face. However, basic understanding like how to buy and sell effectively with the lowest possible cost and tax compliance is desirable. This would enable investors to manage their investment portfolio effectively in the long term.